The global trading system flashed a major new warning sign of its generally deteriorating financial condition with the bankruptcy of Hanjin Shipping Company.
The global trading system flashed a major new warning sign of its generally deteriorating financial condition with the bankruptcy of Hanjin Shipping Co., the South Korean container company and, up until the time of the filing, the eighth largest container line in the world.
Hanjin filed for bankruptcy in Korea on August 31 followed by a Chapter 15 petition in the United States, stranding nearly 80 of its vessels around the world — vessels that were carrying in excess of 500,000 freight containers — and thereby sparking immediate pandemonium for buyers and sellers with goods in transit unable to dock.
The bankruptcy filing seemed to happen without much pre-planning, leaving lawyers for the company scrambling to come up with a plan that would bring the company’s fleet safely into port and allow goods to be unloaded, without completely disrupting the international supply chain for its customers. For retailers in the U.S. the timing couldn’t be worse, with the delay in shipments threatening to create bottlenecks for the all important holiday shopping season.
But troubling as disruption to this year’s holiday shopping season may be, the Hanjin bankruptcy itself is a symptom of more serious problem, namely the deteriorating macro-economic conditions that are confronting many participants in the global trading system.
Hanjin’s bankruptcy was caused by a huge glut of shipping capacity that has been driving down container shipping rates for the last few years. In fact, the China Containerized Freight Index (which measures the average cost to ship containers from China to ports around the world) had fallen to its all-time low in April of this year. The current overcapacity in container shipping is a result of the confluence of two factors – with more than 200 new container ships having been added to world shipping capacity in 2015 at the very time that global shipping demand began noticeably slowing.
According to published reports, Hanjin had been losing as much as $2 million per day operating its large fleet of chartered vessels with significantly underused capacity. The company’s proposed restructuring plan, if implemented, would result in the return of its entire chartered fleet of 60 container ships, imposing major losses on the vessel owners who will presumably face a very difficult task in trying to release their ships given current market conditions.
In the wake of confusion and uncertainty caused by Hanjin’s bankruptcy filing, container-shipping rates have undergone a slight move up in the last few weeks. But it remains unclear what the longer-term effect on container rates might be. Conceivably, Hanjin’s bankruptcy, and possible liquidation, would help firm up container rates by taking some excess capacity off the market.
But in any case, it’s hard to see how the Hanjin bankruptcy is good news for buyers or sellers participating in global trade. Higher container rates may marginally help other shippers avoid financial restructuring but will do nothing to help stimulate global demand. The financial collapse of Hanjin is just one more clear sign of the grave challenges facing many global trade participants, as the global trade in goods (other than digital goods) at best keeps treading water, and the pending round of new international trade agreements has all but lost forward momentum in the face of mounting political opposition in the developed world.